The government has extended the availability of 100% first year allowances (FYAs) on the acquisition of zero-emissions cars, goods vehicles and equipment. This was due to end in April 2021 and will now come to an end in April 2025.
This include the following, which must be new and unused:
- electric cars and cars with zero CO2 emissions
- plant and machinery for gas refuelling stations, for example storage tanks, pumps
- gas, biogas and hydrogen refuelling equipment
- zero-emission goods vehicles, and
- equipment for electric vehicle charging points
The measure is designed to incentivise the uptake of zero emission vehicles, following the government’s announcement that the sale of new petrol and diesel vehicles will be phased out by 2030, and all new cars and vans will be required to be 100% zero emission at the tailpipe by 2035.
This means that transport and logistics companies will be able to benefit from 100% upfront tax relief on the purchase of energy efficient vehicles.
For example, if an energy-efficient vehicle cost £100,000, this would lead to a deduction against taxable profits of £100,000, generating tax relief of £25,000 (at the corporation tax rate of 25%). This does not impact the company’s AIA (Annual Investment Allowance) limit and it remains available for allocation against assets which do not attract specific first year allowances.
The first year allowances described above are separate to the new ‘full-expensing’ rules which apply from between 1 April 2023 to 31 March 2026 on plant and machinery, which is new and unused and not purchased for the purpose of leasing). Both first year allowances and full expensing preserves the AIA limit which can be used against second hand plant and machinery, special rate pool assets (such as water systems, heating systems, air con systems) which is more tax efficient as these assets would otherwise be eligible for less tax relief upfront.
The recent mini-budget has meant that the planned reduction of the AIA amount from £1m to £200k has been revoked and it will now remain at a ‘permanent’ limit of £1m. This can also be allocated against the spend of energy efficient vehicles if there is ‘spare’ allowance remaining.
For vehicles paid for in tranches, provided the expenditure is not required to be physically paid more than four months after the date on which the obligation to pay becomes unconditional, (i.e. typically the invoice date), each tranche of cash paid will attract the tax relief upfront outlined above.
Where companies purchase fleet vehicles under different lease options, the timing of the tax relief can vary. Under hire purchase arrangements, companies will enjoy greater tax relief up front via first year allowances mentioned above. Compared to assets purchased under a finance lease, tax relief is provided as the costs are incurred and therefore the tax relief is spread over the period of the lease.
Following the recent extension of first year allowances, there are some generous tax treatments for energy efficient vehicles. Ensure to speak to your advisor early in the process so that the timing of any capital spend on vehicles can be reviewed and tax reliefs maximised.